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Tuesday, October 9, 2012

Five Mistakes To Avoid When Trading Financial Markets


 
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It’s a well known fact that 95% of “retail” traders (i.e. the small speculators) will lose money trading the financial markets.  Little wonder then that small speculators are referred to as “dumb money” by investment professionals and monitored as a contrarian indicator for future price direction.

It is not simply that the little guys choose the wrong trade, there are a number of classic mistakes that are repeated over and over again that mean losing is all but a certainty, leaving the 5% of winners and the professionals to clean up.

This article highlights what we believe to be the top five mistakes that traders make that can be avoided and increase your odds of success dramatically.

1. Not Planning Your Trades

It is not sufficient to look at a particular market, choose to either buy or sell and cross your fingers hoping for the best.  You must devote time to study your chosen market, decide whether the prevailing trend is up or down, what timescale this trend is over and where the points of support and resistance are.

You have to plan where you are going to buy or sell, where to place your stop loss and most importantly where to exit the trade.  Then, once the trade is planned and executed, you must show discipline – you made the trade for a good reason with solid justification, so any changes need equally solid justification.

2. Lettings Losses Run and Closing Winners Too Early

There is a tendency to become too emotionally involved with a trade once it has been placed, and to want the trade to succeed too much.

Therefore, novice traders tend to let losses run too long, by either widening stops or ignoring signals that the trade is going wrong, in a desperate attempt not to lose money.  All that happens is when you do eventually lose, the loss is a huge one.

Learn to take small losses and you won’t ever get smashed by an enormous loss that blows you out of the water completely – the markets will always be there tomorrow, as long as you still have capital, you are in the game.

On the flipside, novices tend to get over excited when their trades move the right way and into a profitable position and the tendency is to close the trade out earlier than planned to “bank” the profit.  Of course there are times when this is the right course of action, but if your plan said close out at a certain point, unless something has changed, stick to the plan.

3. Chasing Losses

The other classic trading mistake is to “chase” losses – after taking a loss on a trade (hopefully a small, manageable one - see above!) the natural urge is to “put it right” by getting straight back into the markets and winning the lost cash back as soon as possible.

As we know, the only way to trade is by planning each trade and executing it carefully, jumping back in to the markets after calling a losing trade is NOT going to work.

The best advice is to take a few days out of the markets, regroup and plan your next trade.

4. Overtrading

Everyone loves the thrill of placing a trade and entering the market – many traders tend to overtrade, placing too many trades that haven’t been planned properly just to be “in the game” and part of the action.

We at UKGTE only make about 10-20 carefully planned trades a year as overtrading means more money is lost on commissions and spreads and the likelihood of losing is higher as trades are more frequent.

5. Staking Too Much

Money management is the key to real success – too many traders risk far too much of their trading pot on each trade, looking for the “big win” rather than gradual and controlled growth through smaller more manageable trades.

If you go seeking the “big win”, more often than not you will end up finding the “big loss” and then its game over.

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